Twitter moves commodities

It’s no secret that Twitter can be used to measure investor sentiment towards specific stocks and that stocks with high sentiment outperform stocks with low sentiment. The problem is that the performance of portfolios based on Twitter sentiment tends to be low. But a new study found a large impact of Twitter sentiment on another asset class: commodities.

Commodities are notoriously hard to predict and making money with commodity futures is almost impossible. You have to look at the performance of CTA funds. Systematic effects like the carry trade (invest in commodities with the highest roll yield and short the ones with the lowest roll yield), price momentum, or hedging pressure (commodities with the biggest overhang of short or long positions) all work to some extent but aren’t great at generating alpha.

A group from Griffith University has looked at the tweets about commodities and examined the sentiment of these tweets. They found that improving Twitter sentiment leads to higher returns while declining sentiment leads to lower returns. The Twitter crowd does move markets and it doesn’t seem to be a small number of influential investors on Twitter. How many likes or retweets a tweet gets, doesn’t change how much it moves the market.

What does matter, however, is how much buzz is around each commodity. The commodities with the highest numbers of retweets move the most and are responsible for most of the performance of a long-short strategy. And that performance isn’t bad. It is 7.2% per year between 2009 and 2020, compared to 3.3% for a carry strategy or 0.2% for a strategy based on price momentum.

Annual performance of a long-short strategy based on different factors

Source: Fan et al. (2022)